First-Mover Disadvantage: 9 Reasons Being the First to Market May Harm Your Business
In 1988, two Stanford Business School professors wrote a paper in which they described a “first-mover advantage” enjoyed by the first businesses in any given market. The concept has since become extremely popular in business schools and boardrooms around the world. Hundreds of scholars have published articles on this topic and it even has a Wikipedia page. But does the concept still hold in this day and age?
Let’s start by looking at the facts. Most of today’s behemoths — from Google and Facebook to Instagram and Snapchat — were not first-movers. Moreover, the last 20 years have seen a flood of first-movers failing, with companies like Nokia, Yahoo and G.M. all facing dire straits or going under completely.
And while it may be tempting to dismiss these cases as outliers or anomalies that happened in an age of rapid change, we would go so far as to say that the first-mover advantage is more of a myth today. Read the 9 reasons for this listed below — and you might agree.
1. Everyone goes after the first movers
As the old adage goes, “many Pioneers died with arrows in their backs”. Being the first to go anywhere makes you a target for everyone following in your wake — and a big one at that.
Some recent examples:
In 2013 Google launched Google Glass, the head-mounted wearable computer. As a first-mover (or at least, on this scale), Google had to deal with a mountain of issues: immature technology, privacy rights, Wi-Fi signal health concerns and too much media hype. Also, they never really explained to us what the product actually was: a use-case experiment or a ready-for-consumer product? Finally in 2015 the product was discontinued. Now, two years later, numerous companies are picking up where Google left. The best example probably being Snapchat’s Spectacles. Rumour says even Apple is working on smart glasses.
Meerkat — a video-streaming app that preceded Twitter’s Periscope — was cut off from Twitter’s user base and ended up dying in 2015. It was the first to get to market and paid the price for it. Today, Facebook Live, Periscope and Ustream have all secured their spot.
And as one of the classic examples, Craiglist was the first (and biggest) place to look for short-term rentals as recently as 2005. Then, a company named AirBnB started farming it for customers, building a massive business at Craigslist’s expense.
In short, being first means war — which can be a problem, because…
2. Being first is expensive
R&D is expensive. Educating a new market is expensive. Navigating unknown regulatory & legal territories is expensive. Setting up production for a new product at scale? Expensive.
To get an idea of how expensive a simple commodity product can be, consider that Gillette spent $750 million to come up with the Mach3. Almost 20 years later, the Dollar Shave Club offers a near-identical razor that you can bet did not cost hundreds of millions of dollars to develop.
As a first-mover, estimating these costs turns out to be difficult. With market-entry pricing levels that nearly always change. Not to forget the opportunity cost of these first-mover propositions.
3. There’s no prior experience to fall back on
When you’re doing something new, you’re bound to make mistakes. Unfortunately, you may not be able to afford them in your business. Just look at what happened to Apple in the 80s and 90s.
Their first computer — the Macintosh — was a tremendous success. Unfortunately, their industry was new and volatile, and Steve Jobs wanted to continue innovating. This led to a string of failed projects, the departure of multiple key employees and the eventual near-bankruptcy of the company. Which was, ironically, prevented by Microsoft: the same company that became big by copying Apple after learning from their mistakes.
4. All your eggs are in one basket
Being the first to do something usually requires significant investments, for reasons explained above. This can mean there’s less left for other projects and investments, putting the entire organization at risk.
A recent example is hot startup Theranos, which touted a technology that only needed a few drops of blood to deliver accurate results. Founder Elizabeth Holmes went “all-in” on a technology that simply didn’t pan out, and ended up becoming the biggest business failure of the 2010s thus far.
5. Someone has to pay for the up-front investments
New products and services, i.e. those which require significant R&D / development, require significant up-front investments. And I’m not referring to MVPs, but delivery at scale. From parts and equipment to skilled labor, legal/compliance costs, contingency budgets etc.
The question which then rises for the first-mover is: How to deal with these up-front investments? Lower market-entry pricing may be a clever strategy, yet absorbing investments early is risky. In most cases first-movers price their products & services at higher levels at the time of launch than further down the line as the market finds equilibrium (also impacted growing competition).
And that’s without considering the price of…
6. Regulatory resistance
When you shake up an industry, you’re bound to face resistance from lobbyists, politicians and, of course, other businesses. Not to mention legal systems that might not even be ready for you.
Just ask Uber, whose services are suspended in Spain, San Antonio, Portland and South Korea — as well as partially banned in Germany, the Netherlands and Thailand. Regulatory resistance can curb your potential or significantly add to your cost of doing business. One of those factors which should never be underestimated.
Ford was the first company to produce cars — and in 1921, it had a 1,000% market share advantage over GM. Unfortunately, this level of dominance made Ford complacent — and it didn’t do much while G.M. worked tirelessly to expand its product line and offer more kinds of cars. As a result, it only took 10 years for G.M. to overtake Ford in sales.
History seems to repeat itself as earlier this month Tesla’s market value surpassed Ford as investors bet on the future. Yes, being first can be an advantage — but only if you understand the risk of becoming complacent, and take the necessary steps to avoid it.
8. The price of educating your customers
Selling products or services that people don’t trust or understand has never proven to work. This means that selling a novel kind of product or service requires the first-mover to make significant efforts on educating their target audience: why customers should want or need it, what problem it solves and how they should use it.
As an example — when Udemy first came online, it had to persuade both teachers and students that online learning was a viable alternative to in-person classes. If your offer is radically new, you will have to do something similar, which is another disadvantage of being first in a market.
9. Defense fatigue
Following reason 1, the moment you successfully secured a sustainable first-mover position, everyone will come at you. Competitors, startups (often launched yesterday), corporate accelerators, governments, the whole bunch. Attacking your product specs, building similar solutions, developing unfavorable regulations, disrupting your pricing strategy and understanding the customer better than you do.
This nearly always pushes first-movers into a position where they have to continuously defend themselves, while the urgency for continued growth and innovation becomes more important than ever. This defense mode often leads to a certain kind of fatigue which in turn impacts mindset, company culture and performance.
The ultimate reason to avoid being a first-mover is that the Stanford Business School professors behind the original paper had a change of heart just 10 years later. Yes, the “first-mover” concept, which is still popular today, was soundly disproven by its own authors nearly 20 years ago.
You could argue a smarter strategy seems to be: a fast late arrival, joining a young, malleable market after its very first Pioneers — but before everyone and their mom gets in.
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Originally published at RevelX.